How to Max Out Your IRA

5 min read

30 sec brief

Everyone with earned income can contribute to an Individual Retirement Account (IRA.) Even if you have a retirement plan through work, such as 401(k) or 403(b) you are allowed to also have an IRA. Maxing out your IRA can be a great way to save for retirement, or to add to your workplace retirement savings….

Everyone with earned income can contribute to an Individual Retirement Account (IRA.) Even if you have a retirement plan through work, such as 401(k) or 403(b) you are allowed to also have an IRA.

Maxing out your IRA can be a great way to save for retirement, or to add to your workplace retirement savings.

Here’s how to make the most of an IRA:

Aim to Contribute the Annual Limit. If you are younger than 50 you can contribute $6,000 to an IRA for the 2019 tax year. Over 50? You can contribute $7,000.

Spouses Eligible. If you have a spouse who does not earn an income, he or she is still allowed to have his/her own Spousal IRA. The only rule is that the household’s earned income for the year is at least as much as the IRA contributions. For instance, as long as household earned income is at least $12,000, a couple under the age of 50 with just one working spouse could still fund two separate IRAs of $6,000 each.

Divide and Conquer. Like much in life, when you break down a big goal into smaller steps you’re likely to be more successful. For anyone under the age of 50, don’t get uptight about the $6,000 annual limit. Instead, break it into 12 monthly deposits of $500. Or if you find it easier to work with smaller goals, how about $115.40 a week? If you are older than 50, that works out to $583.33 per month or $132.62 per week.

Decide on Traditional or Roth. Basic IRAs come in two flavors: Traditional and Roth. Depending on your income you may be eligible to deduct your contribution to a traditional IRA. In retirement, every penny you pull out of a traditional IRA will be taxed as ordinary income. A Roth IRA doesn’t give you an upfront tax break, but in retirement, your withdrawals will be 100 percent tax-free. Basically your choice between a traditional and a Roth comes down to when you want to pay tax. With a traditional IRA, you pay the tax in retirement. With a Roth, you are making your contribution from regular after-tax income, so you effectively pay the tax upfront.

Keep in mind that you can contribute to both in any year, as long as your combined contributions don’t exceed the annual limit. Or you can toggle between the two from year to year. While it is enticing to grab a tax break today, you might want to give serious thought to how having access to tax-free income in retirement could be a smart move.

There are income limits on who can contribute to a Roth IRA. In 2019, individuals with modified adjusted gross income below $122,000 and married couples filing a joint return with income below $193,000 can contribute up to the maximum. Single filers with income between $122,000 and $137,000 and couples with income between $193,000 and $203,000 can make reduced contributions. Above those upper-income levels, you can’t directly invest in a Roth IRA.

Note for entrepreneurs and gig-workers: you can save for retirement with a Simplified Employee Pension IRA (SEP-IRA). There is no Roth option with a SEP-IRA, but you can still save a lot more each year. In 2019, you can contribute up to 20 percent of your net income, to a maximum contribution of $56,000.

Set up Your IRA at a Discount Brokerage. Discount brokerages such as TD Ameritrade, Schwab and fund companies such as Vanguard and Fidelity all offer a menu of inexpensive mutual funds and exchange-traded funds. If you aren’t sure how to build an IRA portfolio, look for a target-date retirement fund (TDF) with a year in its name that coincides with around when you might expect to retire. The company that runs the TDF will load that one fund with a mix of stocks, bonds and maybe some cash in an allocation that is appropriate given your retirement age. If you are currently 20-something a 2060 TDF will have a lot of stocks, because when you are young you have decades ahead of you. If you’re a 50-something, a 2040 TDF will have a bigger stake in bonds, which help smooth out a portfolio’s returns when stocks decline.

Make it Automatic. One of the best parts of having a 401(k) or other workplace retirement plan is that your contributions are automatically taken out of every paycheck. You don’t have to remember to do it or rely on your willpower to stay committed. You want to create that same fail-safe system with your IRA. When you open your account you can sign up to have contributions automatically zapped from your bank account into your IRA account. You can typically choose to make it weekly, monthly or quarterly. Your bank won’t charge you for this service, nor will the company you choose for your IRA.

Making a lump sum contribution? The earlier the better. A quirk with IRAs is that you have nearly 15 months to contribute. For instance, in 2019 you can make your contribution between January 1, 2019, all the way through April 15, 2020, which is the tax filing deadline for the 2019 tax year. The sooner in that 15-month window that you make your contribution, the more you can save for the future.

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Disclaimer: the content presented in this article are for informational purposes only, and is not, and must not be considered tax, investment, legal, accounting or financial planning advice, nor a recommendation as to a specific course of action. Investors should consult all available information, including fund prospectuses, and consult with appropriate tax, investment, accounting, legal, and accounting professionals, as appropriate, before making any investment or utilizing any financial planning strategy.

About the author

Carla Fried

Carla translates business and personal finance concepts into engaging content that helps individuals make more confident choices in how they manage their money. Her work appears in The New York Times, Money Magazine, Barron's and Consumer Reports.

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